EUR 850.00 For Business Accounts Only

Morningstar | Qantas Posts a Decent 1H Result Despite Higher Fuel Bill

No-moat-rated Qantas has had a challenging start to fiscal 2019, reporting an interim underlying profit before tax of AUD 780 million, down almost 20% on the previous corresponding period. Unsurprisingly, the main driver of the earnings decline was the AUD 416 million increase in fuel cost during the first half. The company was able to pass through some of the higher fuel price, as evidenced by the 6% increase in average unit revenue, although it was unable to fully offset the 10% growth in unit cost (including fuel) during the year. The board declared a fully franked interim dividend of AUD 12 cents per share, ahead of our expectations. We’ve increased our full-year DPS projections to AUD 24 cents from AUD 19 cents.

We’ve lifted our fiscal 2019 EPS estimate by around 3% to AUD 0.62, to reflect a lower than expected fuel bill (AUD 3.90 billion, compared with our previous estimate of AUD 4.1 billion), strong forward bookings (up 7%) and improved utilisation. However, our long-term estimates are broadly unchanged, and we project low-single-digit EPS growth on average over the next five years. We continue to forecast low-single-digit revenue growth in Qantas International over the next five years underpinned by low- to mid-single-digit capacity growth, which will be partially impacted by softening unit revenue as fuel prices continue to decline. We maintain our AUD 5.00 per share fair value estimate which sees the shares overvalued at the current price.

Despite a challenging consumer environment, Qantas domestic business performed relatively well, with revenue up 6%. EBIT grew by a modest 1%, as the company was able to recover most of the higher fuel costs through higher pricing. We were pleased to see utilisation at 80%, reflecting disciplined capacity management. This is marginally higher than it’s been in recent years and broadly in line with our expectations going forward. Additionally, unit revenue should continue to grow in the second half, albeit at a slower pace than in the first half. Management guided to flat capacity in the second half, which translates to minus 1% for the full year, which we have factored into our assumptions.

Qantas’ international business, which is notorious for being volatile and highly competitive, endured a challenging half with a 60% fall in underlying EBIT to AUD 90 million, despite the 5% increase in unit revenue. This weakness reflected an AUD 219 million jump in fuel cost, in addition to less favourable currency movements, higher commissions and cost of doing business. However, on a more positive note, management indicated the competitive environment seems to have stabilised, with a moderate 4% additional competitor capacity in the first half. Management expects competitor capacity addition of 0.3% for second half, which should support higher unit revenue growth than in the first half. While Qantas’ capacity is guided to be flat in the second half, we expect continued strong unit revenue growth and cost benefits as the highly fuel efficient 787-9 Dream liner fleet grew from 5 to 8 aircraft.

Jetstar’s performance was mixed, with strong demand for its key long-haul markets including Bali, Japan, Thailand, and Vietnam, offset by higher fuel bill. Revenue grew by 5%, on the back of strong unit revenue, improved load factor, and an 11% increase in average revenue per domestic seat, all of which helped but were unable to fully offset the higher fuel bill which dragged EBIT down 20% and operating margin down almost 4 percentage points to 12%.

The ongoing transformation program is progressing in line with expectations, with AUD 206 million of transformation benefits (cost savings, increased fuel efficiency, and stronger revenue) realised in the half, sufficiently offsetting inflation, and on track to hit the targeted AUD 400 million by the end of fiscal 2019.